Question

keenan industries has a bond outstanding with 15 years to maturity, an 8% coupon paid semiannually, and a $1,000 par value. The bond has a 6% nominal annual yield to maturity, but it can be called in 5 years at a price of $1,050. What is the bond's nominal yield to call?

Answer 1

First, we need to find the bond's issue price; for that we need to put the following values in the financial calculator:

N = 15*2 = 30;

I/Y = 6/2 = 3;

PMT = (8%/2)*1000 = 40;

FV = 1000;

Press CPT, then PV, which gives us -1196.00

So, now to find the YTC, we need to put the following values in the financial calculator:

N = 5*2 = 10;

PV = -1196.00

PMT = (8%/2)*1000 = 40;

FV = 1050;

Press CPT, then I/Y, which gives us 2.24

Periodic Rate = 2.24%

YTC = Periodic Rate * No. of compounding periods in a year = 2.24% * 2 = 4.48%